Should you refinance your student loans? There’s no one correct answer, as it depends on the type of student debt you have, what refinancing terms you can qualify for, and what your financial goals are.
Review what you might gain and lose by refiꦕnancing, along with some scenarios where it can make solid sense.
Why should I refinance student loans?
When you refinance student loans, yo💙u take out a new loan to pay off your existing debt. The new loan has its own unique rates and terms, so refinancing can be a useful way to adjust and better manage your debt.
Here are some ways refinancing may benefit you:
- Reduce your interest rate: Many people refinance their student loans to save money on their debt. If you can qualify for a new loan at a lower rate than you’re currently paying, refinancing could lower borrowing costs.
- Adjust your loan repayment term: You can also adjust your repayment period to better suit your needs. If you refinance to a shorter payoff time, you’ll likely pay less total interest over time and become debt-free sooner. Or, you could refinance to a loan with a longer payoff time to lower your monthly payments. However, extending your loan term keeps you in debt longer and can potentially cost more in interest over time.
- Simplify the repayment process: If you currently have multiple student loans, you could combine them all into one refinance loan. This can simplify the repayment process by giving you just one monthly payment to make instead of many.
- Switch loan servicers: If you’re unhappy with the assistance provided by your current loan servicer, you could switch to a different servicer that offers better customer service or more borrower benefits.
Related: Student loan consolidation vs. refinancing: Which is best?
Risks of refinancing
While refinancing can be a worthwhile proces🍌s, depending on your current debt, there are also potential risks to refinancing.
If you have federal student loans, the risks of refinancing a💟re generally larger. Federal loans come with special benefits and protections, but you’ll lose access to them i༺f you refinance your debt. For example, you would no longer:
- Be eligible for federal income-driven payment plans
- Be able to modify your repayment plan as needed, including switching to an extended repayment term with lower monthly payments
- Be eligible for federal loan forgiveness opportunities, including Public Service Loan Forgiveness
- Be eligible for other government relief, such as when interest and payments on federal student loans were paused during the pandemic
- Have access to generous deferment and forbearance policies
Make sure you won’t need any of 💦these perks in the future before you refinance, as the process is permanent and irreversible.
| Note: Federal student loan payments and interest were paused in March 2020 due to the COVID pandemic. Refinancing didn’t make much sense for federal borrowers during this time, as they would be required to resume payments as soon as they did. But with the payment pause set to expire on Sept. 1, 2023, federal borrowers may reconsider if refinancing is a good idea. |
If you refinance pr🎶ivate loans, you don’t face any of the above risks since you are simply switching from one private student loan to another. However, not all private student loan borrowers may benefit from refinancing. For example, if you lengthen your repayment timeline or increase your interest rate on your new loan, you could pay more in the long run.
When should I refinance my student loans?
Considering the risks and benefits of refinancing is helpful, but ultimately you’ll need to consider your unique situation carefully to determine when you should refinance student loans. To help youಌ decide, here are a few scenarios when refinancing might ma🦂ke sense:
- You have a good credit score: In this situation, you’re more likely to qualify for an affordable refinance loan — ideally, without a cosigner. Because your new interest rate and terms are determined by your credit, only those with a strong financial footing will get the best offers.
- Your finances are stable: Lenders want to see that you present a low risk of default. If you have a consistent, reliable income, this can help you to qualify for a better rate.
- Refinancing can save you money: You would only want to refinance to a lower-rate loan in most cases, as it would make little sense to borrow using a more expensive refinance loan.
- You only have private student loans: Refinancing private student loans doesn’t require you to give up significant borrower benefits, so there’s less to lose if you can get a better rate than you’re currently paying.
- You’re OK with giving up federal benefits: If you’re confident you won’t need any federal borrower benefits now or in the future, you may decide refinancing federal loans makes sense if you can save enough money by doing so.
- You want to release a cosigner: If you currently have a cosigner who shares responsibility for your student loans, you could remove them by refinancing in your name only.
Related: How to refinance student loans
When not to refinance
There a💝re also some situations when it’s likely not wise to refinance, including the following circumstances:
- You already have a low-interest loan: If you can’t reduce your borrowing costs, refinancing won’t help much unless you need to change your payment timeline.
- You rely on an income-driven repayment plan: Your payment is likely going to be a lot lower on a federal income-driven plan than it would be with a refinance loan, as private lenders generally don’t offer payment plans based on your income.
- You’re working toward loan forgiveness: There are generally no loan forgiveness options with private student loan lenders. If you’re working toward a federal forgiveness opportunity, you’ll disqualify yourself if you refinance.
- You defaulted on your loans: Private student loan lenders typically don’t allow you to refinance loans that are in default. Even if you previously defaulted and your debt is now in good standing, refinancing may be difficult due to your credit. A cosigner may be required.
By carefully considering the pros and cons of refinancing and assessing the specifics 🌌of your situation, you can make an informed choice about whet♋her refinancing is right for you.